Intro
The world runs on energy, and for the last 2 centuries, a major source of the worlds energy has been oil. Historically, it has been an incredibly profitable industry. Today, oil and gas provide 80% of American energy, and provide >12 million American jobs. A similar trend is followed globally, with few exceptions. As a result of the prominence of oil and gas within each nation-state’s energy consumption profile, it is a sought after commodity. Many conflicts both prior and current revolve around, or have implications relating to access to energy resources. A period specific example would be the most recent outbreak of the Russia-Ukraine war, beginning in February 2022. As a result of the re-kindling of this conflict, many European nations that were formerly served by Russian oil/gas had to find new sources of energy, as it was no longer an option to purchase from Russia given the nation’s encroachment upon Ukraine’s sovereignty.
This blog will provide further analysis of the impact that global conflicts have on the movement of energy resources, the price of energy resources, and the subsequent increases of prices for consumers.
Content
Word Search
First, we employed two approaches of sentiment analysis on news
articles to explore the impact of global conflict on oil. We sought out
articles relating to a series of key words that are relevant to our
topic of interest (oil). These articles were found through using a few
different key word searches such as: “Israel-Gaza Conflict”, “Global
Macroeconomic Environment”, “Economic Impact of war” and “How war
impacts national economies”. After performing these searches, we
selected articles that had recent publication dates. We took care to
include articles from different institutions such as
Governments/National Banks, News Media groups, and high ranking
individuals in the private sector. First, we explored the most used
words across the articles.
The output of this analysis gave us insight into the sentiment of the
media, national governments, as well as the private sector. Obviously,
an article from Bloomberg is going to be more likely to contain the
words ‘inflation’ ‘market’ or ‘economy’ than an Emily Dickinson Poem,
but seeing the other words that also appear in tandem with the
aforementioned and viewing the output holistically still gives us a
unique takeaway. That is: among all these economy related terms - oil is
also a frequent topic. To confirm these results, and explore hidden
intricacies, our second approach employed OpenAI’s ChatGPT ability to
identify the key points in each article.
ChatGPT summarized each article into 3 key points (~4 sentences, prompt:
“what are the three most important arguments of this article? be
specific”). These summaries were combined, and the word frequency
analysis is shown above. Ideally, filtering sentiment with ChatGPT
ensures we retain most important arguments of each article. It also
normalizes for length, as each ChatGPT summary is comparable, while
article length (and thus word frequency) may variate. This table
confirms oil’s relationship to global conflict and macro economic
discussion. Thus, a deeper dive into how oil/energy fits into the macro
environment could unearth new trends and make new discoveries.
Federal Reserve Chair Jerome
Powell speaks on raising the benchmark Fed Funds Rate, which impacts
the price of borrowing for financial institutions and eventually,
consumers as well.
Importing & Exporting Nations
The movement of oil across the globe is fascinating. Although some nations have the ability to be energy self-sufficient, much international trade still occurs. One group of nations that is often involved in the trade of oil is known as the Organization of the Petroleum Exporting Countries, or (OPEC) for short. These nations engage in trade both with each other and with non-member nations. They do so with the goal of stabilizing the oil markets to ensure a consistent supply of petroleum to those who require it. The following visualizations show the volumes of crude oil imported and exported in two different years using spatial data. The units are in 1000s of barrels per day, where 1 barrel is roughly 42 US gallons.
Oil Imports
Looking at imports allows for one to see which nations rely on energy from other nations. China, India, and parts of western Europe stand out here. The US is a bit of a unique case, as it imports a similar amount of oil as it exports. This is for a multitude of reasons, but can be boiled down simply: even after shipping costs, it is often cheaper to purchase overseas oil than domestically produced oil.
Oil Exports
On the exports side, things get more interesting. First, China has
almost no exports, and is entirely dependent on other nations to fulfill
its energy needs. Russia on the other hand, is a net-exporter
(exports-imports). Notably, it appears that the amount of oil Russia
exported decreased from 2020 to the year ending Dec-31 2022. A possible
cause of this is the trade restrictions put on Russia as a result of
their invasion of Ukraine in February of 2022.
Import & Export Data Table
Search this table to find discrete values for imports and exports of different nations and groups of nations. Individual years can also be searched. The units for imports/exports are 1000 b/d (thousands of barrels per day).
Oil Pricing
As previously mentioned, for nations such as the United States, the amount of oil that is imported or exported may be dependent on the prices of the commodity in different markets. The visualization below shows the differences in the price of a barrel of crude oil month to month in both the European and US markets.
Over the years, oil pricing has been significantly influenced by key
geopolitical moments. From large scale conflicts to geopolitical shifts,
the plot reflects on how world events impact the oil market. Vertical
dashed lines mark pivotal occasions, such as the onset of the
Russia-Ukraine War in February 2022 and the Iraq War in March 2003. This
visualization serves as a concise yet insightful purpose: illustrating
the relationship between geopolitical happenings and the fluctuations in
oil prices.
CPI Background
We know that oil prices fluctuate. How does this impact the average
American day to day? Probably the most salient impact of the volatility
of oil prices is gasoline prices in the United States. With gasoline,
there is a very straightforward series of connections from the price of
oil increasing to the price at the pump increasing when one goes to fill
their car up with gas. However, the impact that rising oil prices have
on the cost of other goods may be less obvious. For example, goods that
are shipped from China to the West Coast, and then subsequently trucked
across the country may end up being more expensive as a result of the
rising input costs for logistics companies. Logistics companies are
paying more in fuel to bring goods places, and passing that cost onto
the firm who contracts them. Then, that firm is passing the increased
cost of transportation onto the consumer by way of increased prices for
the particular set of goods they provide. As you can probably guess,
these impacts can be difficult to quantify.
Consumer Price Index (CPI) is the
average price paid by a consumer for a “basket” of consumer goods. Here,
we are looking at the CPI for a U.S. consumer from 2017-2022. The CPI is
a feasible way to measure how much of the increased cost of production
for a set of goods goods is passed on to consumers. Obviously, it is
less volatile than oil prices, as it is an index rather than a explicit
value for particular good/commodity. However, we can see that over time,
the price for the “basket” of consumer goods has increased. It is
near-impossible to pin down one specific reason for the increase in the
CPI (We would deserve the Nobel Prize in Economics if we did so), but we
can speculate based on the data we have. Looking at the range from 2020
onward in the oil prices chart, we have seen the moving average
increase, bounded by a support zone of about $25 US Dollars (This just
means the chart hasn’t dipped below that level recently). We see a
similar upward trend in our CPI chart over the same period. We are
unable to make a causal claim because, as previously mentioned, it is
difficult to pin down if/how much increased oil prices have effected the
cost of consumer goods. However, the idea that the price of oil, which
is found in many production processes, has some impact on the final
price paid for a good, is not unheard of.
Conclusion
The analysis that we performed within this project was illuminating. It was surrounding a topic each of us knew to be important, but actually knew very little about. The fact that the lights turn on, water runs, phones charge, all happen as a result of the production and usage of energy. In first world nations like the US, it is often taken for granted. Thus, doing a deeper dive into oil, which is still the predominant source of energy for many nations, was very interesting. It allowed us to discover the complexity and volatility of the global market for the commodity, as well as investigate how said volatility impacts citizens on a day to day basis.
Fortunately, when we were conducting our project we did not have much difficulty finding data. The oil industry is well regulated by government organizations and because it is such a valuable industry at the global scale, it is advantageous for companies and groups to collect lots of data. The majority of our quantitative data came from government websites, or international organizations such as OPEC. We also used text as data, which was easily accessible.
During our analysis, we explored which countries export/import the most oil, what oil prices have looked like over time, and tried to connect the prices of oil to the consumer price index for American Consumers. Our visualizations for exports/imports and oil prices were straight forward and easy to interpret. We ran into trouble when attempting to connect oil prices and CPI. This is where our analysis is most limited. We cannot make any concrete statements about the connections between them. Companies have entire business units delegated to the task of predicting how input prices will impact overall costs, and we did not have the tools nor the data to create a proper predictive model of any significance. However, we did our best to explain the issue we had within the given context
If we had to continue our exploration of the oil industry, there are a few areas that would be interesting to explore. One, if we were able to find data on exactly where oil is imported from/exported to, a network could be created. This would be a very cool way to showcase exactly where oil comes from, and where it goes. We could possibly also find data on shipping lanes and see, similar to flight patterns, what paths those massive container ships take when traversing oceans. Next, getting a more concrete idea of what goes into the CPI and possibly interviewing someone who has more knowledge on it than us would provide useful context for the reader. Lastly, doing an investigation into where energy is going in the future. Oil is a non-renewable source of energy, and governments are doing everything they can to prevent the continued use of fossil fuels globally and slow the effects of climate change. Looking at things like carbon credits, wind/solar energy, and nuclear energy would be cool avenues to look at in the future.
References
Sources:
Ma, Dorothy, and Alice Huang. “Evergrande under Pressure in Hong Kong Court to Repay Creditors.” Bloomberg.Com, Bloomberg, 28 Nov. 2023, www.bloomberg.com/news/features/2023-11-28/evergrande-under-pressure-in-hong-kong-court-to-repay-creditors.
Jeffrey Feltman, Sharan Grewal, et al. “The Israel and Gaza War: Economic Repercussions.” Brookings, 24 Oct. 2023, www.brookings.edu/articles/the-israel-and-gaza-war-economic-repercussions/.
Mena, Bryan. “Israel-Hamas War Risks Further Deglobalization and Inflation | CNN Business.” CNN, Cable News Network, 15 Oct. 2023, www.cnn.com/2023/10/15/economy/stocks-week-ahead-deglobalization/index.html.
“Defense Department Continues to Stress Law of War with Israel.” U.S. Department of Defense, www.defense.gov/News/News-Stories/Article/Article/3578196/defense-department-continues-to-stress-law-of-war-with-israel/. Accessed 5 Dec. 2023.
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“Testimony by Chair Powell on the Semiannual Monetary Policy Report to the Congress.” Board of Governors of the Federal Reserve System, www.federalreserve.gov/newsevents/testimony/powell20230621a.htm. Accessed 5 Dec. 2023.
“Speech by Vice Chair for Supervision Barr on Financial Stability.” Board of Governors of the Federal Reserve System, www.federalreserve.gov/newsevents/speech/barr20231116a.htm. Accessed 5 Dec. 2023.
Rappeport, Alan, and Patricia Cohen. “Fragile Global Economy Faces New Crisis in Israel-Gaza War.” The New York Times, The New York Times, 10 Oct. 2023, www.nytimes.com/2023/10/10/business/economy/global-economy-israel-gaza-war.html.
“CPI Home.” U.S. Bureau of Labor Statistics, U.S. Bureau of Labor Statistics, www.bls.gov/cpi/. Accessed 5 Dec. 2023.
The Economic Benefits of Oil & Gas - Department of Energy, www.energy.gov/articles/economic-impact-oil-and-gas. Accessed 12 Dec. 2023.
“What Is the Connection between the Price of Oil and Inflation?” DW Energy Group, 19 Jan. 2023, www.dwenergygroup.com/what-is-the-connection-between-the-price-of-oil-and-inflation/#:~:text=The%20correlation%20of%20oil%20to%20the%20Consumer%20Price%20Index%20(CPI)&text=A%20surge%20in%20the%20prices%20of%20oil%20can%20increase%20the,passed%20on%20to%20their%20consumers.
“OPEC” OPEC, www.opec.org/opec_web/en/. Accessed 12 Dec. 2023.
Martin, Tillier. “America Produces Enough Oil to Meet Its Needs, so Why Do We Import Crude?” Nasdaq, www.nasdaq.com/articles/america-produces-enough-oil-to-meet-its-needs-so-why-do-we-import-crude#:~:text=That%20happens%20because%20of%20a,cheaper%20than%20domestically%2Dproduced%20crude. Accessed 12 Dec. 2023.
With special thanks to OpenAI’s ChatGPT.